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Reasons Health Insurance Is So Expensive in the U.S.

A trip to the emergency room sucks. But sometimes what comes later is even worse—the bill for the visit.

Like, have you ever opened an ER bill and seen a $30 charge for an aspirin? Even though the same stack of cash in a drugstore could buy you five bottles of the stuff! Or maybe you’ve noticed those stitches your son needed this year cost quadruple what the same thing cost your daughter a few years back? Yeah. It’s shocking when you think about how expensive health care has become. And it makes you wonder—why is health insurance in the U.S. so expensive?

With prices rising annually, it’s enough to make a budget-minded consumer throw up their hands and ditch health insurance completely! Do not go there. Health insurance is a nonnegotiable part of your safety net. And trying to go through life without it is setting yourself up for disaster in the form of depleted emergency funds, vanishing savings and even bankruptcy.

The truth is the way health care services get charged and paid is complex. And with all the legal layers and business regulations around health care, it’s no surprise that the price of health insurance is rising.

Why Is Health Care So Expensive?

Watching the news or reading online, the reasons for health insurance being so expensive might seem confusing. But there are some basic factors we can look at to get a general picture of what’s going on with spiraling health insurance costs. Not only can you get a clear understanding of what’s driving them, you can also take steps to contain them for yourself and your family. Let’s look at the main factors pushing health insurance costs up, and then talk about some ways to fit this vital coverage into your budget.

The Affordable Care Act of 2010

In 2010, President Barack Obama signed into law a little something known as the Patient Protection and Affordable Care Act (ACA for short).1 It took a few years to phase everything in, but by 2014 most of the main parts of the law were in force. The purpose of the new law was to help as many Americans as possible to have access to health insurance, many for the first time in their lives.

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The results of the law were mixed—and are still hotly debated. On the plus side, millions of people were newly covered for health insurance. That much is clear, since the law required every health insurance company in America to accept anyone as a customer, regardless of their preexisting conditions.

But here’s the part where the math kicks in and blurs the picture a bit. Traditionally, health insurance premiums were lower for customers who were young and healthy, but higher for those with preexisting conditions—which makes sense in terms of the higher cost to cover someone who uses a lot of health care. But when the ACA became law, it stopped insurance companies from charging higher premiums to customers with preexisting conditions. Companies were now required to offer the same premiums to a person with a history of cancer or heart attacks as they would to someone in perfect health with no history of illness.

At that point, two big changes hit insurance companies at once:

  • They had to accept absolutely anyone who applied to them for health insurance, massively driving up the number of people eligible for service in their networks, and
  • They had to charge everyone in a uniform way, regardless of how much cost any person or group represented for the companies.

This had an immediate outcome that was a pain in everyone’s assets: Insurance companies had to pay out way more per person covered. If only those companies had been willing to eat the new costs instead of passing them on to their customers. Sadly, that’s not actually how business works. Businesses—even insurance companies—have to turn a profit to stay open.

So companies had two options: go out of business completely, or raise their prices. When you look at it that way, it’s not shocking that we all saw a huge increase in across-the-board health insurance premiums.2

The ACA is only one piece of why health insurance is so expensive in the U.S.—but it’s a significant factor, any way you stack it.

Administrative Costs

Another factor sending U.S. health care costs higher and higher is a host of administrative costs. Overall, the health care system spends hundreds of billions of dollars annually on this expense alone!3 And you’d better believe those costs have an impact on insurance premiums! Here are a few facts and figures to help you see how thick the red tape is wound around health care:

Administrative costs account for anywhere from 15–30% of overall health care spending, studies find.4 (This includes items like medical billing, hospital administration, scheduling patient appointments and insurance management.)

  • Most hospitals have more billing specialists on staff than they have beds for patients.5
  • The structure of health care and how it’s provided in the U.S. is more complex than what’s found in other countries. Here, all levels of government, from local up to federal offer some form of health coverage to constituents and employees. Then there are the private insurance companies and employers who cover all or part of their workers health insurance.

Prescription Drugs

Prescription drug prices have played a large role in ever-increasing health insurance costs. Thankfully, recent regulatory changes in the pharmaceutical industry have helped to slow the rise in prescription prices, but they’re still going up (including a nearly 3% spike during 2020 for 260 commonly used medications).6 And if you stretch the question back a few years, the price of many of those commonly used drugs spiked even more dramatically—some more than 40% between 2015 and 2020.7

One quick way to help contain these costs for yourself no matter your insurance coverage is to opt for generic medications (they’re the same as name brand and are often significantly more affordable).

Lifestyle

Your grandmother probably told you, “An ounce of prevention is worth a pound of cure.” And that proverb has never seemed truer than it does today! Although we all have health setbacks in life, not all diseases or injuries are a result of congenital conditions or random bad luck. Often health problems arise from lifestyle—and that can play a huge role in making health care more expensive everywhere.

Painful as it might be to consider, poor diet and lack of exercise contribute in a big way to many of the costliest health problems, such as:

  • Diabetes
  • Heart disease
  • Obesity
  • Cancer

Saving money is far from the only, or even the main, benefit of pursuing a healthy lifestyle! Being fit will absolutely benefit your budget (which is brilliant). But it will also just make you happier and help you to steer clear of hospitals and doctors’ offices.

Find the Best Health Insurance Plan for You

So many variables can influence the cost of health insurance. And it’s never been more expensive than right now. But here’s one thing that’ll never change—your need for health insurance coverage. As you pursue a lifestyle of building wealth and protecting it, playing offense is only half the game. Sure, saving up money and investing it for growth is awesome. But you also need some layers of protection around your money. And health insurance is an essential part of that protection!

The best way to uncover and understand your health insurance options so you can get the coverage you need is by working with an experienced insurance pro. Our Endorsed Local Providers (ELPs) are unbiased health insurance experts and will be able to tell you about the most cost-effective plan that’s right for you. Connect with one of our trusted ELPs today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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